Ukraine Bonds Weigh On Emerging Market Funds

By Michael Aneiro

The upheaval in Ukraine has created headaches for some big emerging-markets bond investors, but that’s not stopping other opportunistic investors from buying lately. Matt Wirz and Katy Burne report in today’s Wall Street Journal that some investors pounced as Ukraine’s bond prices rebounded from 78 cents on the dollar to 84 cents last week, while others have faced steep losses:

The uncertainty highlights the challenges facing emerging-markets investors amid uneven global growth and political flare-ups from Venezuela to Bosnia to Brazil. Many seek to deliver high yields by buying out-of-favor investments, most notably Ukraine’s largest bondholder, Franklin Templeton Investments.

Because of the low-interest- rate policy of the Federal Reserve, “even to preserve one’s wealth, one has to take risk,” Michael Hasenstab, Franklin Templeton’s global-bond-fund manager, said in a promotional video posted in January on the firm’s website. “Our job is to really identify which risks we think we’re getting compensated for and which risks we think are not worth taking.”

Franklin Templeton held $7 billion of Ukraine government bonds at the start of the year. The market value of the firm’s holdings fell $522 million through Feb. 19, according to data from Ipreo and FactSet.

The key question facing investors is whether the political upheaval could force Ukraine into some sort of debt restructuring. The story cites an S& P estimate that Ukraine must spend $13 billion to service its foreign-currency debt this year, while the country’s international reserves fell to $17.8 billion in January from $20.4 billion in December